FMS PG Rev.

8/8/2019 FMS PG Rev.

1/51

FINANCIAL MARKET &

SERVICES

INTRODUCTION TOFINANCIAL MARKETS &

SERVICES


2/51

BROAD COVERAGE OF THE COURSE

This is a half credit course and we expect to cover it in

following six sessions

Introduction to Financial Markets and Services

Innovative methods of project financing (Securitization,

Factoring, Forfaiting etc.)

Public Issue management

Credit card, Debit card and Smart card Credit rating

Venture capital Financing


3/51

EVALUATION

CLASS TEST / ASSIGNMENTS: 10 MARKS

CLASS PARTICIPATION: 10 MARKS

FINAL EXAMINATION: 30 MARKS


4/51

INTRODUCTION TO FINANCIAL

MARKETS & SERVICESAGENDA TODAY

Investment

Meaning, Objective and Characteristics

Types of Investors

Investment avenues

Importance and need for investment in securities

Financial Market & its segments

Types of equity issues

Stock Market and Stock Exchanges: Need & Functions

Important Stock Exchanges in India.

Financial Services and types.


5/51

INVESTMENT

INCOME = EXPENDITURE + SAVINGS

Investment is an activity in which people areengaged to utilize their savings for better

returns to meet future needs. Investments are made from savings; however

all savers are not necessarily investors!

It is a commitment / employment of fundsmade with the aim of achieving additionalincome or growth in value.

Investment is an activity that involves risk.


6/51

INVESTMENT (contd.)

In financial sense, investment is a commitment of apersons surplus funds / savings to derive income in future.

The income could be in the form of interest, dividend,

premiums, pension benefits, insurance policies,

appreciation in their values, etc. This investment generatesfinancial assets.

Economically, investment would mean net addition to

economys capital stock in the form of creation of goods or

services e.g. investment in new constructions, plant andmachinery, etc. This investment generates physical assets

as also other benefits like employment, technology, etc..


7/51

FEATURES OF INVESTMENT

All investments are governed by certain

characteristics / basic features. These are:

RETURNS : Primary objective

RISKS : Inherent

LIQUIDITY : Marketability

SAFETY : Certainty of recovery

HIGHER RETURNS, HIGHER RISKS!

HIGHER LIQUIDITY, HIGHER SAFETY!


8/51

OBJECTIVES OF INVESTMENT

Maximizing returns

Minimizing risk

Hedging against inflation or price

fluctuations resulting in loss of value of

your portfolio / financial assets.


9/51

TYPES OF PARTICIPANTS

IN ANY MARKETHEDGERS

SPECULATORS

(Scalpers, Day Traders and PositionTraders)

Speculators could also be classified as

Bulls, Bears, Lame Ducks and Stags!!ARBITRAGERS


10/51

INVESTMENT V/S SPECULATION

Both are closely related since both involvepurchase of assets and both aim at good

returns.

They are different in following respects: Risks: Less in investment and more in speculation

Capital gain: Prime short term objective of

speculation v/s Stable return on investment Time period: Investment is long term, speculation

is not.


11/51

INVESTMENT, SPECULATION

Investment is planned carefully, evaluated andthen funds are allocated. Is systematic. Requiresknowledge of various alternatives / avenues toplan.

Speculation is taking calculated risks. Issomewhat systematic. Also requires knowledge.

Speculation V/S Gambling.

Gambling creates artificial and unnecessary risksin the hope of big and quick returns e.g. horseraces, lotteries, etc.


12/51

Gambling and speculation

Speculation typically lasts longer than gambling but is of shorterduration than investments. A speculation usually involves the

purchase of a salable asset in hopes of making a quick profit froman increase in the price of the asset which is expected to occurwithin a few weeks or months. Those involved in speculation are

usually reluctant to refer to this activity as speculation because theydislike the connotations of the word; they prefer to refer tospeculations as short term investment activity.

A gamble is usually a very short-term investment and is a game ofchance. The holding period for most gambles can be measured in

seconds. The result of so-called investment is quickly resolved bythe roll of a dice or the turn of a drum or card. Such activities have

planning horizons that are far too short to undertake any researchthat usually precedes an investment activity.


13/51

Importance and need for investment in

securities

Financial Market

- What is a market?

- In financial market, financial

assets are sold and bought.


14/51

Economyis abigger market!!

Various participants in an economy are:

Household sector,

Business Units in the industrial or commercial sector, Private Sector V/S Public Sector i.e. Government

organizations, departments and units involved in

various economic activities and transactions involving

money, etc.All of them spend money. Some spend more than they

earn while others earn more than they spend!!


15/51

FINANCIAL MARKET

BEHAVIOURPrimary lenders: Cash surplus generators / household

sector

Ultimate borrowers: Deficit generators e.g. units in

Government, commercial and industrial sectors.

Financial market deals with transfer of funds from

primary lenders to ultimate borrowers through variousMechanisms. This is possible and also necessary for

overall sustained development of economy.


16/51

Financial Markets mechanism for

transfer of funds

Transfer of funds from primary lenders to ultimateborrowers:

Primary lenders Banks Ultimate borrowers

(Fixed deposit is a financial asset for the primarylender)

Ultimate borrowers Public Issue of shares Primary lenders (share is a financial asset for the

primary lender) When financial assets transferred are securities, the

market is known as securities market.


17/51

SECURITIES MARKET

Comprises two categories on the basis of maturity period:

MONEY MARKET

Short term financial assets with one year or less maturity e.g.

Certificates of Deposit, treasury bills, etc. These are close

substitutes for money and hence form a good source for working

capital for business and industry.

CAPITAL MARKET

Financial assets of more than one year maturity are sold or

bought. These include Equity shares, preference shares, bonds

and debentures, etc. They form a good source of long term funds

for business and industry.


18/51

SECURITIES MARKET

Comprises mainly two categories viz. primary market andsecondary market.

PRIMARY MARKET

Securities issued are either new securities or securities which are already

outstanding and owned by the investors. Private companies and PSUs may

issue these securities (shares, bonds, debentures, etc.) to raise required

capital. New issues could be in the form of public issue, rights issue or

private placement.

SECONDARY MARKET

This market deals with securities which have been already issued andsubscribed to and are owned by individuals or financial institutions. These

can then be traded by and between the investors. The buying and selling

usually takes place through the mechanism of a stock exchange.


19/51

TYPES OF ISSUES

Methods which are used for floating shares of acompany in the primary market (new issues market)are:

Public Issue: Sale to members of public (at fixed price or

through book building process), prospectus is necessary,Cost to the company is high.

Rights Issue: Sale to existing shareholders in proportion totheir current holding (Section 81 0f Companies Act 1956).Prospectus not necessary. Less costly process.

Private Placement: Sale to selected group of investorsusually institutional investors, financial institutions, mutualfunds, etc. Prospectus not necessary. Least costly process.


20/51

STOCK MARKETS

They form an integral and essential part of the capital markets. Indian Stock Markets are one of the oldest in Asia. Their history dates back to

over 150 years.

East India Company played a dominant role and used to transact business in itsown loan securities (end of eighteenth century).

Trade took place only in a few corporate stocks and shares in banks and cottonpresses.

There were only half a dozen brokers recognized by banks and merchantsduring 1840 to 1850.

1850's witnessed a rapid development of commercial enterprise and brokeragebusiness attracted many men into the field and by 1860 the number of brokers

increased to 60. In 1860-61 the American Civil War broke out and cotton supply from United

States to Europe was stopped; This led to growth of cotton industry in India,which in turn increased the trading in shares of cotton presses. Disastrousslump followed in 1874 with the American civil war coming to an end.


21/51

STOCK MARKETS.contd.

The brokers established offices on Dalal Street in 1874. In 1887, they formally established in Bombay, the "Native

Share and Stock Brokers' Association" (which is alternativelyknown as " The Stock Exchange ").

In 1895, the Stock Exchange acquired premises on Dalal Streetand it was inaugurated in 1899. Thus, the Stock Exchange atBombay (BSE) was born.

Stock exchanges later came up at Ahmedabad (1894) andKolkatta (1908).

Indian cotton and jute textiles, steel, sugar, paper and flour millsand all companies generally enjoyed phenomenal prosperity,due to the First World War.


22/51

STOCK MARKETS.contd. Madras Stock Exchange (1920 23) and revived in 1935. In 1957

the name was changed to Madras Stock Exchange Limited.

In early sixties there were eight recognized stock exchanges inIndia viz. Bombay, Calcutta, Madras, Ahmedabad, Delhi,Bangalore, Hyderabad and Indore. They were recognized under

the Securities Contracts (Regulation) Act, 1956. The number virtually remained unchanged, for nearly two decades.

During eighties, however, many stock exchanges were established.

At present, there are totally twenty one recognized stockexchanges in India excluding the Over The Counter Exchange

of India Limited (OTCEI) and the National Stock Exchange(NSE) of India Limited.

Stock markets are governed by Securities and Exchange Board ofIndia (SEBI) established in 1989.


23/51

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges is limited tolisted securities of public limited companies:

Specified securities (forward list) and non-

specified securities (cash list). Equity shares of dividend paying, growth-oriented

companies with a paid-up capital of at least Rs.50million and a market capitalization of at least

Rs.100 million and having more than 20,000shareholders are, normally, put in the specifiedgroup and the balance in non-specified group.


24/51


25/51

PURPOSE OF STOCK / CAPITAL

MARKET

It helps in the capital formation in thecountry.

It maintains active trading. It increases liquidity of assets.

It also helps in price discovery process

It facilitates speculation in controlledmanner thus avoiding gambling.


26/51

FUNCTIONS OF

STOCK EXCHANG

ES To provide a market place where selling and purchasing of

securities can be done in a transparent manner and in a

controlled environment.

To provide liquidity to investments made in securities. To help in valuation of securities.

To provide a barometer / indication of overall performance of

the economy.

Stock exchanges thus provide an important linkage between

the savings of the household sector and the investments in the

Corporate sector.


27/51

Shortcomings of Stock Markets

Scarcity of floating stocks: Financial institutions, banks andinsurance companies own 80% of the equity capital in the

private sector.

Speculation: 85% of the transactions on the NSE and BSE

are speculative in nature. Price rigging: Evident in relatively unknown and low quality

scrips. Causes short time fluctuations in the prices.

Insider trading: Obtaining market sensitive information tomake money in the markets.

Financing from capital markets; there are two ways acompany can raise money from the financial markets: debt andequity.


28/51

Major stock exchanges in India

NATIONAL STOCK EXCHANGE (NSE)

BOMBAY STOCK EXCHANGE (BSE)

OVER THE COUNTER EXCHNAGE OFINDIA (OTCEI)

INTERCONNECTED STOCK

EXCHANGE (ISE)


29/51

National Stock Exchange (NSE)

On the basis of the recommendations of high powered Pherwani Committee,the National Stock Exchange was incorporated in 1992 by IDBI, ICICI,IFCI, all Insurance Corporations, selected commercial banks and others.Started functioning in 1994.

International Class. Uses modern trading system viz. National ExchangeAutomated Trading (NEAT) State of - the - art client-server based

application. Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations -

Institutions and corporate bodies enter into high value transactions infinancial instruments such as government securities, public sector unit

bonds, commercial paper, certificate of deposit, etc.


30/51

ADVANTAGE NSE!

NSE has several advantages over the traditional tradingexchanges. These are:

1. NSE brings an integrated stock market trading networkacross the nation.

2. Investors can trade at the same price from anywhere in thecountry since inter-market operations are streamlinedcoupled with the countrywide access to the securities.

3. Delays in communication, late payments and themalpractices prevailing in the traditional trading mechanismcan be done away with greater operational efficiency andinformational transparency in the stock market operations,with the support of total computerized network.


31/51


32/51

Bombay stock exchange

Bombay Stock Exchange is the oldest stock exchange in

Asia.

BSE is the first stock exchange in the country which

obtained permanent recognition (in 1956). It switched over from the open outcry system to an online

screen-based order driven trading system in 1995.

BSE has two of world's best exchanges, Deutsche Brse

and Singapore Exchange, as its strategic partners.

The market capitalization as on December 31, 2007 stood

at USD 1.79 trillion.


33/51

Bombay stock exchange

The BSE Index, SENSEX, is India's first stock market indexand is tracked worldwide. It is an index of 30 stocksrepresenting 12 major sectors.

Apart from the SENSEX, BSE offers 21 indices, including12 sectoral indices. BSE has entered into an indexcooperation agreement with Deutsche Brse. Thisagreement has made SENSEX and other BSE indicesavailable to investors in Europe and America

TheB

SE On-line Trading (B

OLT): BSE On-line Trading(BOLT) facilitates on-line screen based trading in securities.BOLT is currently operating in 25,000 Trader Workstationslocated across over 450 cities in India.


34/51

OTCEI

To provide improved services to investors, the country's first ring-less, scrip-less, electronic stock exchange OTCEI was established by country's premierfinancial institutions viz. Unit Trust of India (UTI), Industrial Credit andInvestment Corporation of India (ICICI), Industrial Development Bank ofIndia (IDBI), SBI Capital Markets, Industrial Finance Corporation of India(IFCI), General Insurance Corporation (GIC) and its subsidiaries and

CanBank Financial Services. Trading at OTCEI is done over the centers spread across the country.

Securities traded on the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on theOTCEI can be bought or sold at any OTCEI counter all over the country and

they should not be listed anywhere else Permitted Securities - Certain shares and debentures listed on other

exchanges and units of mutual funds are allowed to be traded

Initiated debentures - Any company with at least one lakh debentures of aparticular scrip can offer them for trading on the OTCEI.


35/51

INTERCONNECTED STOCK EXCHANGE

(ISE)

Fourteen regional exchanges (excluding Calcutta,

Delhi, Ahmedabad, Ludhiana and Pune Stock

exchanges) have joined together to promote ISE

of India Ltd.

Established in 1998

Recognized by SEBI

Started operations in 1999. Is recognized as aNational Level Exchange


36/51

DEPOSITORIES

Financial securities like shares, debentures, bonds, etc. are issued bycompanies to investors who purchase them. They were earlier issuedin physical form or certificates. The trade used to take place betweenthe buyers and sellers through the clearing house of an exchange.Issuing or transfer of certificates used to be done by the companiesor their authorized transfer agents.

The physical form of transfer has now become outdated and replacedby electronic form. Securities are represented by entries in thedepository accounts opened by the investors specifically for this

purpose.

On selling, the sellers account is debited and the buyers account is

credited. The securities are thus issued, held and transferred indematerialized form. Hence, seller and buyers both need to haveDemat accounts.

Depositories are important for transactions in demat form.


37/51

DEPOSITORIES

Depositories are like banks. Banks hold cash while a depository holdssecurities for investors in electronic form. A depository interacts withclients through Depository Participants or simply referred to asDPs.

There are two depositories in India:

- National Securities Depository Limited (NSDL) - estd. In 1996and

- Central Depositories Services (of India) Limited (CDSL)

established in 1999.

They are regulated by SEBI

Many banks function as Depository Participants.

You can hold securities in physical or dematerialized form. However,transfers are now a days only through demat accounts because ofseveral obvious advantages.


38/51

TYPES OF INVESTORS

INDIVIDUAL INVESTORSLarge in numbers, limited individual capacity,usually lack the skill of extensive evaluation and

analysis before investing. INSTITUTIONAL INVESTORS

Few in numbers, Large surplus funds, engage

professionals to undertake extensive evaluationand analysis before investing.


39/51

AVENUES FOR INVESTMENT

WHAT ARE THE

DIFFERENT AVENUES

FOR INVESTMENT?


40/51

AVENUES FOR INVESTMENT

Fixed deposits with banks / Financial Institutions

Post office deposits / schemes

Government, Semi-Government securities / bonds

Corporate FDs Mutual fund schemes

Life insurance / pension policies

Provident fund (EPF, PPF)

Real estate Securities (equity, preference capital, debentures)

Equity or commodity derivatives


41/51

Financial System

A system that establishes and provides a regular, smooth,efficient and cost effective linkage between depositors andinvestors.

Features of a financial system:

Provides an ideal linkage between depositors and investorsand thus encourages savings and investments

Facilitates the expansion of financial markets over spaceand time

Promotes the efficient allocation of financial resources for

socially desirable and economically productive purposes Influences both the quality and pace of economic

development


42/51

Constituents

A Financial System comprises:

Financial Institutions

Financial Services

Financial Markets Financial Instruments


Institutions that provide credit and credit related

services Savings mobilizers They transfer funds from surplus

units to deficient units


43/51


They are the major constituents of the financial system inthe country

They deal in financial resources which means that theycollect surplus money in the form of deposits fromindividuals and institutions and lend them to trade andindustry, which are in deficit and require these funds.

They may buy and sell financial instruments

They need to be regulated by a regulatory body, which inturn is governed by the political system in the country.

We have banking as well as non banking financialinstitutions

There are also special institutions which provide financialassistance to specific sectors and for specific purposes


44/51


45/51

Financial Services

Various services that are provided by financial institutions in a financialsystem are called financial services.

They are offered by both asset management companies and liabilitymanagement companies apart from the financial institutions.

The financial services facilitate not only raising the required funds but alsoensuring their efficient distribution.

These are usually provided by the stock exchanges, special and generalfinancial institutions, banks, non-banking finance corporations andinsurance companies.

Regulated by SEBI, FMC, RBI and/or other regulatory bodies.

Examples of Financial Services

Leasing, credit cards, factoring, portfolio management

Underwriting, discounting and rediscounting of bills Acceptances , brokerage and stock holding

Deposit Insurance

Securitization, Loan Syndication, Credit Rating


46/51

Financial Services

Objectives

Fund Raising

Funds Deployment

Functions

Specialized Services

Regulation

Economic Growth


47/51

ASSIGNMENT

What is a stock market index?

Which are the stock market indices created by

BSE? How are they calculated? What do theyindicate?

Which are the stock market indices created by

NSE? How are they calculated? What do they

indicate?


48/51

TYPICAL REVIEW QUESTIONS

What are the functions of stock exchanges?

Write short notes on:

ISEOTCEI

NSE

Speculators and their types

BSE Sensex

S & P CNX Nifty


49/51

TYPICAL REVIEW QUESTIONS

Which are the national level stock exchanges in the country?Write a short note on any one of them.

What are depositories? What is a depository participant?

Explain the role of depositories in securities trading. Holding securities in demat form has several advantages

Explain.

What is a stock market index? How is it calculated? Explainwith one example. (Home Work : Visit BSE website)

Name any four major stock market indices and describe themin brief.


50/51

REVIEW QUESTIONS

What is the need and functions of stock

exchanges in a country? Write a short note on the

largest stock exchange in the country.


51/51

REFERENCES

Financial Services by M. Y. Khan Finacial Services by Dr. S. Gurusamy

Security Analysis & Portfolio Management by FischerDonald E. & Ronald J. Jordan (Prentice Hall of India)

Financial Market Analysis by Blake, David, McGrawHill, London

Investment Analysis & Portfolio Management by FrankK. Reilly & Keith C. Brown (Seventh Edition)

Security Analysis & Portfolio Management by S. Kevin(Prentice Hall of India)

FMS PG Rev.

Documents

Transcript of FMS PG Rev.